Apple (AAPL) is Not Dead, Logic Has Departed
Date Published: 2018-12-27
DisclaimerThe results here are provided for general informational purposes, as a convenience to the readers. The materials are not a substitute for obtaining professional advice from a qualified person, firm or corporation.
LEDEWhile Apple stock has been plummeting the chorus line has been growing louder -- Apple is dead. There's one thing though, Apple is not dead, and even more bizarre, the calls of its death are in fact, literally, illogical.
So many stories have come out about Apple's iPhone demand from suppliers, both in earnings calls and the media, that we have to give some credence to the data. It does appear iPhone sales this holiday season will slow and could be lower than where estimates stood before just a few months ago.
But, some conclusions have been drawn that are not just wrong, they are, in fact, illogical. But before that, we can get into some more positive news.
REMEMBER ANDROID SWITCHERS?
Apple CEO Tim Cook has noted Android switchers, those people switching from an Android phone to an iPhone, for quite a while. His allusion to these switchers points to the fact that the smart phone market doesn't actually have to grow in the United States, Apple still has about half of the market it can reach to -- those on Android phones.
CNBC has reported that a report by Consumer Intelligence Research Partners found that in the 30 days after the iPhone XR was released, 16 percent of U.S. iPhone buyers upgraded from Android phones.
To put that number into context, we have this snippet (our emphasis added):
So, it does appear that those Android switchers are accelerating, meaning Apple is adding yet more people to its massive active user base.
In fact, Mike Levin, CIRP partner and co-founder said "It appears that iPhone XR did serve to attract current Android users."
THE ILLOGICAL CONCLUSION
Apple made a splash, the bad kind, in its last earnings call when it announced it would no longer share iPhone unit sales (nor iPad). That was a move to less transparency and likely a move to hide the reality that unit sales have stagnated and will stagnate.
The company moved higher by showing large increases in average selling prices (ASPs), but that strategy obviously has an end, at some point.
Apple countered the negative narrative on the last earnings call, which was some truth and some spin. Apple has clearly moved away from being just a phone company - or at least it wants the world to feel that way. The CFO did say rather clearly that iPhone unit sales have had essentially no correlation with the stock price for the last year.
The point here is that Apple is now an ecosystem company and within that ecosystem it sells phones, tablets, personal computers, laptops, various wearables, and several services.
The unit sales of a particular piece of that ecosystem are not truly meaningful - what is meaningful is the actual total sum revenue number and earnings numbers.
To that point, Apple will be more transparent than before with respect to the second biggest piece of that ecosystem, which is Services. Apple also noted that it continued to see strong growth in paid subscriptions reaching over 330 million.
But here's where the illogical conclusions from the bears come. The argument goes that if iPhone until sales growth slows, or even worse, shrinks, then the Services business too will shrink, since those users are mostly iPhone owners.
Now stop for a second and see if you can spot the illogical conclusion.
See it? Here it is...
Apple's unit sales growth is slowing because people are upgrading their phones much less often. So, let's say Apple sells 200 million iPhone phones this year, perhaps next year it sells just 170 million -- that would be shrinkage, right?
No, not right. That would be shrinkage in growth. If Apple sells 170 million iPhones next year, irrespective of how many the company sold last year, that is 170 million more phones.
That is, some will be Apple users upgrading to newer phones, and some, obviously, will be Android switchers. While the growth in units will shrink, the user base will almost certainly grow -- and grow substantially.
Wall Street has gotten its underwear turned around and drawn an equivalency between slowing growth and losing users. That is not the case.
And, how do we know this is not the case? How about data?...
DATA - YOU KNOW, TRUTH
While Apple's unit sales last quarter were essentially unchanged from last year, here's what happened to Services, straight from the last earnings call:
We also got these gems:
* Our installed base is growing at double digit[s]
* Apple Pay is by far the number one mobile contactless payment service worldwide.
* Apple Pay generated significantly more transactions than even PayPal Mobile with over 4 times the growth rate.
* We generated record Q4 earnings [from] services, and wearables drove our momentum and we produced strong double-digit revenue growth in all of our geographic segments.
Even further, Bank of America Merrill Lynch (BAML) put out a note that showed the iPhone userbase compounded annual growth rate (CAGR) over the past 2 years is 15%, primarily driven by strong double-digit growth in the used iPhone world.
So, you see, slowing unit sales does not mean Services is doomed, or that it has peaked. Slowing growth does not mean fewer iPhone users -- quite the contrary.
It's a good reminder that when the bear market arrives, logic tends to depart. Let's not be those people.
The reality is that Apple has become less transparent and that is not as good for investors. But, that's all that happened last quarter -- that was all of the "bad" news.
It's understanding technology that gets us an edge to find the "next Apple," or the "next Amazon." This is what CML Pro does. We are members of Thomson First Call -- our research sits side by side with Goldman Sachs, Morgan Stanley and the rest, but we are the anti-institution and break the information asymmetry.
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Thanks for reading, friends.
The author is long shares of Apple at the time of this writing.
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